Supply, Demand and Elasticity

Question 1

Complementary goods

Answer 1

Two goods that complement one another that are said to be in joint demand.
E.g. Fish and chips, phones and chargers

Question 2

Demand

Answer 2

The quantity of a good or service that consumers are willing and able to buy at a given price in a given time period.

Question 3

Demand curve

Answer 3

Show the relationship between the price of a good and the quantity demanded over a period of time. For normal goods, more of the good will be demanded as the price falls.

Question 4

Effective demand

Answer 4

When a consumer’s desire to buy a product is backed up by an ability to pay for it. All demand must be effective.

Question 5

Latent demand

Answer 5

Where there is a willingness to purchase a good or service, but where the consumer lacks the real purchasing power to be able to afford the product.

Question 6

Law of demand

Answer 6

There is an inverse relationship between the price of a good and demand. As price falls we see an expansion of demand. If prices rise there will be a contraction of demand.

Question 7

Market demand

Answer 7

The sum of the individual demand for a product from each consumer in the market. If more people enter the market, then demand at each price level will rise.

Question 8

Supply

Answer 8

The quantity of a good or service that a producer is willing and able to supply onto the market at a given price in a given time period.

Question 9

Law of supply

Answer 9

As the market price of a commodity rises, producers expand their supply onto the market (produce more).

Question 10

Composite demand

Answer 10

Exists where goods or services have more than one use so that an increase in demand for one product leads to a fall in supply of the other.
E.g. If more milk is used for making cheese, ceteris paribus there is less available for butter.

Question 11

Consumption

Answer 11

The use of a good or a service by consumers to satisfy a want or a need

Question 12

Consumer surplus

Answer 12

A measure of the welfare that people gain from the consumption of goods and services. It’s the difference between the total amount that consumers are willing and able to pay for a good or service (shown on demand curve) and the total amount they actually pay (market price)

Question 13

Competitive supply

Answer 13

Goods in competitive supply are alternative products a firm could make with its resources.
E.g. Using milk to make cheese or yoghurt

Question 14

Cross price elasticity of demand

Answer 14

(CPed) measure the responsiveness of demand for good A following a change in the price for good B (related good).
This can be substitute goods (positive coefficient) or complimentary goods (negative coefficient).

Question 15

Derived demand

Answer 15

The demand for a product X might be strongly linked to the demand for a related product Y.
E.g. Demand for steel is strongly linked to demand for new vehicles

Question 16

Income elasticity of income

Answer 16

(Yed) measures the relationship between a change in quantity demanded and a change in real income.
Yed = %change in QD / %change in real income

Question 17

Inferior goods

Answer 17

Often cheaper, poor quality substitutes for other goods. As income rises, the demand for inferior goods decreases.
E.g. Public transport
They have a NEGATIVE income elasticity of demand (Yed)

Question 18

Joint supply

Answer 18

Describes a situation where an increase/decrease in the supply of one good leads to an increase/decrease in the supply of another.
E.g. Contraction in supply of lamb, reduces the supply of wool

Question 19

Market supply

Answer 19

The total amount of an item producers are willing and able to sell at different prices, over a given period of time.
A market supply curve is the horizontal summation of all each individual firm’s supply curves.

Question 20

Normal goods

Answer 20

Demand for normal goods increases as income rises.
Normal necessities have a Yed between 0 and +1.
Normal luxuries have a Yed (greater than) >+1.
All normal goods have a POSITIVE (Yed) income elasticity of demand.